The Looming China Trade War: How Did We Get Here?

Washington
I write about international economic policy, with a focus on trade

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The Trump administration this month described a range of actions it planned to take against China, from investment restrictions to tariffs to a case at the World Trade Organization (WTO). China, in turn, warned the United States of the serious consequences of a trade war.

So how did we get to this juncture? We have not had an uncontrolled escalation of trade barriers since the Great Depression. That episode was sufficiently bad that the major trading nations of the world devoted a great deal of post-war effort to avoiding a repeat.

It is tempting to place all the blame on the Trump administration, with its aggressive and unorthodox approach to international relations. In fact, each side deserves a share.

As far as China is concerned, it has failed to grow into its role as a global economic power. It took on substantial obligations to liberalize its economy when it joined the WTO in 2001. In the lead-up to that moment, there had been a major debate about whether China should join as a developing nation with relatively few obligations (because China was poor) or whether it should take on the burdens that developed nations assume (because China was large). As it played out, China’s commitments were more befitting a developed country. That did not mean that China committed to avoiding all objectionable behavior. But its commitments were significant, and it largely followed them.

However, China was left feeling that it had done at least its fair share. It was not inclined to do much to help conclude the next round of global trade talks (the “Doha” round), which faltered badly in 2008. Then, with the global financial crisis, China lost much of its motivation to follow the lead of the West in adopting economic reforms.

In its turn away from reform, China ended up taking a lot of actions the United States and others found objectionable. It pursued policies such as a cavalier approach to intellectual property, extensive subsidies and an excessive state role in markets. These were a very poor fit with a basically cooperative and market-oriented global economic system and contributed significantly to tensions with the United States and other countries. China’s mistreatment of foreign companies investing there has meant that a major voice for moderation in commercial relations – the U.S. business community – has stepped back significantly from that role.

The United States, meanwhile, has often let itself get distracted in its commercial diplomacy with China. The Trump administration certainly does this with its badly misguided emphasis on bilateral trade deficits. But earlier Congresses and White Houses gave undue emphasis to China’s currency policies at a time when the United States really had no better alternative policies to push for.

Not only did the U.S. wish list have the wrong items at the top, it was often excessively long. Bilateral dialogues would conclude with promises across a wide and unfocused range of topics, rather than concentrating on a few key points of concern.

The Trump administration, in its erratic and unfocused behavior toward China, has made a bad situation worse. It canceled those dialogues altogether. Meanwhile, the president veers between warm summitry, quick trade deals and claims that no one can blame the Chinese on the one hand, and railing about trade deficits, intellectual property violations and trade barriers on the other. There is neither an obvious sequencing to the complaints nor any clear signaling to the Chinese about prioritization. This lack of clarity is a major risk factor for conflict.

Beyond this, the Trump administration pursues diplomatic approaches that are almost guaranteed to fail. The most effective method of changing Chinese economic behavior is through multilateral initiatives, such as the Trans-Pacific Partnership (TPP) and the WTO. The Trump administration abandoned the TPP almost immediately and has derided and neglected the WTO. It has expressed a general disdain for multilateral approaches, for no particularly good reason. A next-best approach would be an alliance with some key trading partners such as the European Union, Canada and Japan, but Trump actions such as the Section 232 steel tariffs have systematically alienated those potential allies.

As to what comes next, China seems to have been fairly careful about not responding to policy announcements but instead waiting until policies are actually adopted. Whether the resulting calm precedes a storm will depend on whether the Trump administration can find its diplomatic footing with a seriously reshuffled cast of characters. Given that the president’s top trade advisers were selected for their aggressive and benighted approach on the topic, there is relatively little reason for optimism.

I am Senior Fellow on the Global Economy at the Chicago Council on Global Affairs, and teach International Business Strategy at Northwestern University’s Kellogg School of Management. I have previously been Senior Economist for Trade for President George W. Bush’s Council o...